I used to be requested this query on Twitter this afternoon:

This was my reply (over six tweets):

Thanks to your query Jay. Your query is predicated on a standard false impression that banks lend savers’ cash. Really, they do not. The Financial institution of England lastly admitted this in 2014. When a financial institution lends, it creates new cash out of skinny air. There actually is a magic cash tree.

That new cash then creates deposits in financial institution accounts. In different phrases, lending creates financial savings. However financial savings are by no means wanted for a financial institution to make a mortgage.

All it is because cash is nothing greater than debt. If I promise to pay the financial institution £20,000 and so they promise to pay £20,000 to the storage I need to purchase a automobile from our mutual guarantees to pay create that new cash. And when the mortgage is repaid that cash is cancelled.

So what do financial savings do within the macroeconomy? Completely nothing in any respect normally. Banks know that. That’s the reason they’re so reluctant to pay for them. They’re low cost capital for them, possibly, however that is it. They’re simply useless cash.

That is additionally true of most pension saving by the best way – when most is saved in second-hand shares and second-hand buildings and no new worth is created by the saving, in any respect, in principally instances.

If this was correctly understood we might seriously change our financial system for the higher. It is not understood as a result of the powers that be (banks and large finance) need us to suppose they’re actually helpful. Largely they are not, and will not be till we make them funders of inexperienced funding.